Investors Buy Into Chipotle’s Redemption, Even if Analysts Don’t

Shares of the beleaguered Tex-Mex eatery defied the professional stock-pickers, putting new pressure on them

Less than a year ago, Chipotle Mexican Grill (NYSE:CMG) was considered untouchable. Still reeling from the impact of a poorly handled food poisoning matter from late 2015, CMG stock fell to a multi-year low in February 2018 following yet-another disappointing fourth quarter report. The misery, it seemed, would never end, and analysts were only too happy to toe that line.

Almost needless to say, the 116% gain CMG stock has mustered since falling to that low has caught many investors — and a few too many of those pros — off guard.

As a group, the analyst community is mostly sticking to its guns. Despite the incredible rally that makes a bold statement about confidence in Chturnaround (and the corresponding fundamental improvement that backs it up), the consensus price target remains well below the current price of Chipotle stock. Analysts also still rate CMG stock closer to a “Hold” than a “Buy.”

This may well be a case, however, where would-be buyers want to take note of how the stock is behaving and ignore what the pros are still saying.

Down, But Not Out

Anyone even thinking about buying Chipotle stock must embrace two realities: The shares aren’t going to win any value-oriented awards anytime soon; AND, as red-hot as the bullishness still is, it would be naive to not think some profit-taking pressure will hit CMG stock soon.

Still, it’s a compelling even if speculative possibility.

The backstory is well-known. In late 2015, Chipotle was pegged as the source of an E. coli outbreak that ultimately sickened 55 people. Bolstering consumer worries about the chain’s store cleanliness was a nightmarish 2017 video, shot by patrons at a Dallas store, of rats falling from the ceiling.

The Tex-Mex operator measurably struggled with its bacteria debacle, and though dead rats didn’t up-end a budding revenue rebound, that may mostly be the result of a very low bar set in 2016. Analysts didn’t anticipate much more than a slight improvement in business after 2016’s implosion.

And that’s where they missed the boat. Some are doubling down on their oversight, now insisting there’s no upside left to tap into.

Improving Fundamentals

For the most part, consumers have forgiven even if they haven’t quite forgotten. Sales should be up 7.9% for 2018 when Chipotle reports its fourth quarter numbers in early February.

That progress isn’t just the mere result of a snapback from unusually low comps, however. Analysts, in spite of a despondent view of Chipotle stock, are still modeling another 7.9% improvement for the company’s top line.

Even more impressive is Chipotle’s earnings recovery.

As much of a toll as the troubles had on revenue, it had an even bigger impact on the bottom line as the restaurant chain spent heavily shore up past and potential problems.

That’s changing in a big way now, though. Analysts expect a full-year profit of $8.51 per share of CMG stock with February’s report, up from 2017’s $6.60, and leading into what should be earnings of $11.96 a share for the year now underway.

CMG Investors Have Spoken

The numbers are everything they should be. Indeed, they’re everything they can be for a company overcoming a public relations disaster.

And it’s in that regard investors and analysts are seeing matters from a different point of view. Individual and professional investors pushed CMG stock well above the Street’s consensus target of $485 early in January, and have since carried it to a multi-year high of $540.

Where they normally might improve their views and hike target prices to reflect such a gain, analysts haven’t budged this time around.

It’s not a terribly surprising stubbornness, given the situation. Chipotle has been on the road to real recovery for a couple of years now, but the E. coli taint is never too far removed from the discussion. The chain shouldn’t be able to move past it, given its severity, subconsciously prodding professional stock-pickers to ignore the growth evidence that says otherwise. And, as is the case with any other industry, egos can occasionally drive these professionals into making bad decisions; group-think is still a problem among analysts, too.

But, the market has spoken. It doesn’t care what the pros think this time. Retail and even institutional investors this time around believe the recent past points to the foreseeable future.

And those traders have yet to flinch. Normally, they would’ve by now, after a 37% advance in just five weeks.

Looking Ahead for Chipotle Stock

Don’t read the wrong message. After a 37% romp, it would be surprising if we didn’t see some measure of profit-taking sooner rather than later. But, by that same token, don’t read too much into any lull. Even if a stumble cuts deep, the bulls have tipped their hand. Any sell-off should be contained relatively quickly.

The real party will start once the professionals concede they can’t fight the tape any longer, and start upgrading CMG stock.

In fact, that trend may already be underway. JPMorgan Chase analyst John Ivankoe last week upped his price target on shares, suggesting “well-above average” sales and margin growth were in the cards. His new target of $500 per share is still below the stock’s present price, but at least it gets the ball rolling.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.